Once a strange beast of the investing world, attractive only to the stupid and greedy, bitcoin is now a commonplace asset. But what drives it up or down remains a mystery, especially as the price stays at $30,000, half the $60,000 level it enjoyed in April. Craig Erlam, senior analyst at Oanda Europe, offers some expert insights.
Q: Following an exuberant first few months of 2021, bitcoin has continued to languish at these markedly lower levels since May. What are the reasons for its downward trajectory?
A: There are a number of things being attributed to the downturn, including crackdowns from a regulatory perspective and the Tesla U-turn on transactions [saying it would no longer accept payments in bitcoin]. While there’s no doubt these are playing a large role, we can’t ignore the fact that the explosion in prices left it vulnerable to a correction of this magnitude. It remains an extraordinarily volatile instrument and clearly nothing has changed on that front.
Q: Speaking of the regulatory crackdown, countries appear to be making moves to regulate bitcoin and other cryptocurrencies. How much does this influence the price, if at all?
A: It does have an effect on price but perhaps not as much as it could do. During downturns, the impact tends to be more severe. Bitcoin advocates are far more interested in uptake, which is why Elon Musk and Tesla is a much greater factor. If companies and thought leaders continue to embrace it, regulatory threats will be overlooked in the belief that it will become too big and too widely backed to stop.
Q: Why is it that other cryptocurrencies (aka alt-coins), like Ethereum, tend to move in line with the bitcoin price fluctuations. What is driving them as a collective?
A: Firstly, I think acceptance of bitcoin represents acceptance of cryptocurrencies more broadly. If one succeeds and breaks down the barriers in front of it, others can follow. I think this is the primary reason. The second may be a sign of ongoing immaturity in the space and the get-rich-quick attitude — people buying cheaper alt-coins in the hope of riding the bitcoin wave and making the move self-fulfilling.
Q: Despite bitcoin being described by many punters as the new gold, there doesn’t appear to be much of a correlation between the price of gold and bitcoin at the moment. Ought there to be?
A: You would think so, particularly in these early stages. I must say, I don’t believe this is the case. There is no evidence of it. The comparison is made out of hope and loose logic rather than anything of substance. It’s a highly speculative and volatile instrument with no history of being a safe haven or inflation hedge. It may have aspirations one day to be that but absolutely not at this point. Which is why there’s no correlation.
Q: If bitcoin isn’t a safe haven asset like gold, is it a risk asset — or how do you classify it?
A: I would say bitcoin is a highly speculative asset. During risk on, it perhaps can ride the risk wave. But then look at the performance of bitcoin against stocks since mid-May and you can see there are other, far more important factors at play.
Q: Previously, when bitcoin prices tumbled like they have in recent months, market observers would be quick to proclaim the bubble to have burst. There’s little talk of that now. Why is that — have people accepted it is here to stay?
A: Cryptos are being discussed and backed by a much broader range of people these days, which is why the bubble isn’t being talked about as bursting in the same way it was. The backing gives it more solid foundations than it had previously. That doesn’t mean it’s immune by any stretch of the imagination as it remains highly speculative. A 50% drop, even more if it goes to $20,000, doesn’t represent a bubble bursting like it would in any other instrument. It’s to be expected. But it needs to bounce back or we may see interest wane once more. But that doesn’t seem likely in the near term as there’s still a lot of hype and some very high-profile backers. Whether that stands the test of time is another thing.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.